MNI:US Credit Mkt Wk Ahd:Traders Eye 2018,Tax Reform,Econ/Jobs

--Traders Also Watch Congress, Pres. Trump, Fed Actions

By Sheila Mullan

     NEW YORK  - Traders in the U.S. Treasuries next week will have lots to

focus on: the New Year and busier high-grade corporate bond issuance, the 2018

tax reforms going into action, and watching the economy and Federal Reserve

policy progress.

     Traders looked to leave early amid the short session Friday, Dec. 29th; the

U.S. cash bonds closed at 2:00 p.m. ET while the U.S. financial futures on the

CME closed at 1:00 p.m. ET.

     Next Monday, Jan. 1, will be a full U.S. government bond market holiday,

with U.S. stocks, banks and government offices also closed. But the markets and

business get right back to action on Tuesday, Jan. 2nd, with busy high-grade

corporate bond issuance eyed.

     Traders also eyed the implications of the important U.S. tax reform bill

passed by the Congress last week. "The Tax Cuts and Jobs Act will take effect

somewhat sooner than we expected, in 1Q18 instead of 2Q18," said JPM economist

Michael Feroli. "It is also somewhat larger than expected in the next few years,

before a few important measures are scheduled to sunset."

     Congress also will resume work next week, while U.S. Pres. Donald Trump

will be returning from a vacation in Florida.

     "All of us should take the quiet final session in a quiet final week for

what it is however, for next week will be very busy," said John Briggs, head of

strategy/Americas at NatWest on Friday.

     "Not only do I think markets will have their usual high level of activity

as risk appetites rev up again and as P&Ls are reset to zero, but there is a ton

of top-tier data out as well as the potential for political news if Trump kicks

the year off with a strong drive for infrastructure spending," he added.

     That is "one of the reasons I am reluctant to ride this latest leg of curve

flattening," he said. "Also, I think the front end out to the belly has enough

Fed priced in for now with about 3 hikes priced for next year" so "looking for a

further weakening of the front end here seems like poor risk-reward."

     BMO analysts Ian Lyngen and Aaron Kohli expect that the U.S. 10-year note

yield will close 2018 "at 2.40%, but not before a test of the bottom of the

recent range (2.00%) and the risk of an inverted 2s/10s curve as early as the

March meeting; if not, then by June." (That compared to the 10-year note yield

now at 2.425%).

     "While we've been focused on this risk since September 2017, when the Fed

signaled its intention to push forward despite realized inflation, it has become

increasingly consensus - a dynamic that always gets us nervous, but we're

nonetheless convinced of the fundamentals behind the call," they said. "If

anything, the newfound popularity of the forecast leaves us open to an inversion

earlier in 2018, which will subsequently be followed by a resteepening."

     They added the "more challenging call will be correctly timing the

inversion of the 5/30-year US Treasury curve. We're comfortable assuming that it

happens sometime during the next 12- to 18-months - with an acknowledgment that

the prior three occurrences came near the end of the Fed's previous hiking

cycles," they said.

     Meanwhile, the U.S. Congress had averted a government shutdown for the near

future, as it passed a continuing resolution to fund the government temporarily

until January 19.

     Meanwhile SocGen analysts Alain Bokobza, Gaelle Blanchard and Sophie Huynh

said their 2018 multi-asset portfolio calls had the idea of "be ready for the

end of Goldilocks." One key call they had was to for "exit (risk) strategies

gaining momentum in 2018" was to go: "Long 10y US Treasuries;" "Short 10-year

Bund/Long -year euro peripheral bonds;" "Long euro inflation-linked bonds;"

"Short Russell 2000 versus Eurostoxx 50," and "Long Japan equities," and "Long

Best of Value basket."

     But they did warn of risks of the "Fed, ECB, BoJ and BoE not normalizing

policy on the back of a growth slowdown."

     Traders differed on what to focus on for next year. Some cited "stubbornly

low inflation and overall levels of debt will prevent yields from rising once

again," as one put it. He noted "Amazon bought Whole Foods and cut prices 15%,"

with "more coming" to reduce inflation."

     But others said that taxes generally and the U.S. deficit will be important

to watch next year.

     And BA/ML corporate bond analysts Hans Mikkelsen, Yuri Seliger and Yunyi

Zhang projected the top 5 risks for 2018 for high-grade US dollar corporate

bonds: #1. "Foreign inflation picking up;" #2 "Increasing cost of dollar

hedging;" #3 "Macro shocks;" #4 "No tax reform;" and finally, #5 "Releveraging

event risk."

     NatWest analysts John Briggs, Brian Daingerfield and Blake Gwinn "have

turned neutral on (Treasuries) duration, from bullish. We are wary of taking too

much from market moves in holiday dampened markets."

     They also "see more corrective steepening ahead" and are "long 5s on the

curve as the belly looks cheap in our view." They are "constructive on inflation

breakevens, but would wait to seek entry for a pullback to the 1.65%-1.75%

area," they said.

     And Friday Jan. 5 brings the key December US nonfarm payroll employment

report. The MNI economist poll projects a median estimate of 190,000 vs. the

prior November 228,000 report. The poll projected medians of 185,000 December

private payroll employment, 4.1% jobless rate, a 0.3% Average Hourly Earnings

gain and 34.5 hours average hourly workweek.

     Jefferies economists Ward McCarthy and Tom Simons projected a 175,000

December jobs gain, 170,000 private payrolls gain, a 4% jobless rate and 0.3%

average hourly earnings gain. 

     And traders will watch the Saudi Arabia/Iran/Lebanon news and North Korea,

too. Also, Treasuries should see foreign exchange-tied buying by black box hedge

funds if the U.S. dollar weakens against the Japanese yen, or selling if the

dollar firms, said traders.

     The Federal Reserve also gradually is reducing its balance sheet of $4.2

trillion in U.S. Treasuries and Agency MBS.) The Fed started its taper/reduction

program in October 2017 to whittle down its huge balance sheet of bonds bought

to aid market tightness since the 2008-2009 financial crisis.

     Once tapering begins, the Treasury would have to figure out how to slice

debt issuance to cope with such a Treasuries runoff. The taper started in MBS

with the Friday Oct. 13 announcement on MBS rolldowns, and started at the end of

October in Treasuries. 

     The Open Market Desk will buy a maximum of $12.2 billion in Agency MBS from

Dec. 29, 2017-Jan. 12, 2018.

--- MONTHLY CAPS ON SOMA SECURITIES REDUCTIONS --------------

US TREASURIES.../AGENCY MBS/MONTH CAP 

- Oct-Dec 2017.. $6 billion./$4 billion 

- Jan-Mar 2018.. $12 billion/$8 billion 

- Apr-Jun 2018 $18 billion../$12 billion 

- Jul-Sep 2018 $24 billion../$16 billion 

- From Oct 2018** $30 billion $20 billion

-- Questions? sheila.mullan@marketnews.com 212-669-6432; story also reflects

contributions from Giovanny Guerrero of MNI/New York.

-- A calendar of market events (data, Fed speakers) is below: 

Date/Time ET Prior Data/And MNI Econ Poll Median Estimates

---------------------------------------------------------------------

- Jan1 US bond/stock markets/government holiday for New Year's Day

- Jan2 0945 *** Dec Markit Mfg Index (final) 55.0/--

- Jan2 1130 am ET US Tsy $48.0B 13-Week Bill auction

- Jan2 1130 am ET US Tsy $20.0B 52-Week Bill auction

- Jan2 1300 pm ET US Tsy $42.0B 26-Week Bill auction

- Jan2 1300 pm ET US Tsy $50.0B 4-Week Bill auction

- Jan3 *** Dec NA-made light vehicle sales SAAR 13.3M/13.4M

- Jan3 0700 ** 29-Dec MBA Mortgage Applications --/-- %

- Jan3 0855 ** 30-Dec Redbook retail sales m/m 0.1%/-- %

- Jan3 0945 * Dec ISM-NY current conditions 58.1/--

- Jan3 1000 *** Dec ISM Manufacturing Index 58.2/58.2

- Jan3 1000 * Nov construction spending 1.4%/0.7%

- Jan3 1000 * Jan help-wanted online ratio 1.14/--

- Jan3 1400 Federal Reserve release Dec 12-13 FOMC Mtg mins Washington

- Jan4 0730 * Dec challenger layoff plans 30.0/-- %

- Jan4 0815 *** Dec ADP private payrolls 190K/-- k

- Jan4 0830 ** 30-Dec Weekly initial jobless claims 245K/240K

- Jan4 0945 *** Dec Markit Services Index (final) 52.4/--

- Jan4 0945 * 31-Dec Bloomberg comfort index 52.4/--

- Jan4 1030 ** 29-Dec natural gas stocks w/w --/-- Bcf

- Jan4 1100 ** 29-Dec crude oil stocks ex. SPR w/w --/-- m bbl

- Jan4 1330 StL Fed Bullard On Econ/Mon Pol at Meltzer conf; Phil Q/A

- Jan4 1630 ** 03-Jan Fed weekly securities holdings --/-- t USD

- Jan5 0830 *** Dec US nonfarm payroll employment 228K/190k

- Jan5 0830 *** Dec US private payroll employment 221K/185k

- Jan5 0830 *** Dec US unemployment rate 4.1%/4.1%

- Jan5 0830 *** Dec US average hourly earnings 0.2%/0.3%

- Jan5 0830 *** Dec US average workweek, all workers 34.5/34.5 hrs

- Jan5 0830 ** Nov trade balance -$48.7B/-$48.3B

- Jan5 1000 *** Dec ISM Non-manufacturing Index 57.4/57.8

- Jan5 1000 ** Nov factory new orders -0.1%/1.0%

- Jan5 1000 ** Nov factory orders ex transport 0.8%/-- %

- Jan5 1015 Phil Fed Harker on Econ Outlk: AEA/ASSA Mtg; Phila; Q/A

- Jan5 1030 Clvld Fed Mester: MonPol/Macroecon Stab ASSA mtg Phila Q/A

- Jan5 1100 ** Q1 St. Louis Fed Real GDP Nowcast --/--%

- Jan5 1115 ** Q1 NY Fed GDP Nowcast --%/--%

- Jan5 1500 * Dec Treasury STRIPS Holdings --/-- b USD

- Jan6 1015 Clevld Fed Mester on Fincl Stab/Mon Pol:ASSA mtg; Phila Q/A

- Jan6 1015 NY Fed EVP Potter:"Safe Assets Shortage" ASSA/AEA Phil Q/A

     - Jan7 0800 SF Fed Williams:paper session Derivs/Lower Bound; Phila Q/A

--MNI New York Bureau; tel: +1 212-669-6432; email: sheila.mullan@marketnews.com

[TOPICS: MTABLE,M$U$$$,M$$FI$,MN$FI$,MN$FX$]